Unbundling in the Airline Business

Jun 02, 2015

An air carrier starts charging for the first bag and provides a great real-world example of unbundling in the process.

Other posts have looked at real world examples of bundling – the practice of selling different items together as a package with a single price. Think of fast food value meals that include a burger, fries and a drink, or a snack food combo at the movie theater that includes popcorn, soda and candy.

Unbundling is the opposite. Unbundling involves taking something that is generally seen as a package, splitting it up into component items, and charging for each separately. A recent example comes from the airline business.

A very popular airline (due in no small part to the fact that it did not charge extra for the first bag) has announced a change in policy. They will start charging for the first bag. This is an example of unbundling – most people feel that the flight is a bundle that should include at least one checked bag, and the airline is now selling them as two separate items. It's almost like one ticket for you, and another ticket for your bag.

We think that by unbundling and charging for bags separately we have an opportunity to lower our econo fares.

They say that this will allow them to reduce base fares, and that definitely benefits one group of travellers: those that don't need to check bags.

Clearly there is a cost to handling (manpower, insurance, lost luggage claims) and transporting (fuel) luggage that is separate from the cost of transporting people. Checked bags were never really free, the cost was just bundled into the cost of the ticket. That meant travellers without bags were subsidizing those that had bags. This move is good for them – people that want to check bags carry the cost, and those that don't get lower base fares.

Unfortunately they don't get all the savings back. Saretsky also said that WestJet wouldn't “give all the benefit of the first baggage fee back to guests" and went on to say that "This will all be revenue positive".

That means that the real cost of flying on the airline has effectively gone up. If you do need to check a bag you will get a lower base fare (good) but, once you factor in the real cost of travel with the checked bag fee, you are almost certainly paying more (bad).

This is just one more step in a long history of airline unbundling. Before this it was food, before that alcoholic beverages, somewhere in there airlines started charging for headphones too. In each case the airlines split up what travellers had previously considered a package and started charging separately for the items.

Is it a good move for the airline? Travellers seem to really resent this kind of thing, but are largely themselves to blame. When most people book flights they compare prices online, often choosing the lowest base fare. They tend to do this without factoring in the costs of checking a bag.

In the past, if you compared Westjet fares with much of the competition, and took a second to factor in the fact that the first bag was free, their prices were almost always better. The base fare might have been higher, but the true cost of travelling with a bag was lower. If customers don't stop to consider that then a carrier has little choice but to unbundle so they are better able to compete on price.

Is it a good move for other retailers? Think about airlines – there really aren't very many options, and competition to be the cheapest is fierce. Unbundling definitely annoys customers, but if a seller truly believes it can help them win a price war then unbundling probably makes sense.

Most retailers can't be so certain. Take florists for example – there are only so many airlines that can fly you from New York to Chicago, but there are thousands of outlets that promise to get flowers delivered to either city. It would be very hard to win that price war no matter how much the florist unbundled their product.

And while travel might often be discretionary (you don't have to take that holiday to Mexico) the flight usually isn't. The flight is generally considered a necessary evil, something that has to be endured before the holiday can get started. The florist doesn't want to thought of that way.

Unbundling, and the draw of low base prices, will appeal to some customers. But that doesn't mean that there isn't a place for bundling. Even airlines, Westjet included, don't exclusively unbundle. If you purchase a ticket in a higher fare class you still get a free checked bag (or two), food, and even drinks.

Earlier today I was speaking with a florist that was looking at changing the way they charged for some ancillary things (delivery, etc.) and it brought to mind the dangers of unbundling things perceived as entitlements.